In Greece’s Crisis, Fed Studies Wall St.’s Activities

Greece’s problems deepened on both sides of the Atlantic as the Federal Reserve disclosed it was investigating Goldman Sachs and other banks that helped the country mask its debts, and investors grew increasingly leery of lending any more money to a nation flirting with default.

Wall Street’s role in the run-up to the debt crisis has generated criticism and calls for an inquiry from European leaders. The Fed examination is the first time American regulators will examine the highly profitable if little-known business of supplying custom-made financial instruments to strapped countries on the Continent.

While Greece’s economic troubles have transfixed world markets for weeks, its problems have snowballed in recent days as workers went to the picket lines to protest budget cuts and the government struggled to raise cash to cover what is Europe’s largest budget deficit. Last year, Greece’s deficit equaled 12.7 percent of gross domestic product.

On Thursday, the Moody’s ratings agency joined Standard & Poor’s in warning that it might downgrade Greek government bonds, a move that would increase the premium Athens must pay to borrow. The move comes at a precarious time for Greece, which must raise 25 billion euros ($34 billion) over the next few months to avoid a sovereign default that officials fear could cause the finances of other weak European economies to collapse.

Petros Giannakouris/Associated Press

Greece’s economic troubles have transfixed markets for weeks, and recently, workers there went on strike to protest budget cuts.

In a sign of the challenges their nation faces, Greek officials also called off a planned trip to the United States and Asia aimed at interesting new investors in its bonds because of a lack of demand, according to an investment banker who was briefed on the government’s fund-raising strategy.

The European Union has said it would come to Greece’s aid only if it develops a plan to reduce its deficit by March 16, further ratcheting up the pressure.

“Even if they bring the deficit to zero, with interest rates at 6.5 percent and a growth rate of zero at best, Greece’s debt ratio remains on an explosive path,” said Miranda Xafa, a former executive board member at the International Monetary Fund. “I just don’t think they can raise funds from the market now.”

Greece has suffered from large deficits for years, and until now it seemed as if big banks would always be there to bail it out. As far back as 2000 and 2001, Goldman helped Athens quietly borrow billions to mask its poor finances by creating derivatives that essentially transformed loans into currency trades that Greece did not have to disclose under European rules.

Ben S. Bernanke, the Federal Reserve chairman, told Congress Thursday that the Fed was “looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece.”

Mr. Bernanke said the Securities and Exchange Commission was also concerned about how derivatives — financial instruments that are largely unregulated and do not trade on public exchanges — have contributed to Greece’s problems. “Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive,” he said.

The S.E.C., in a statement, said that it could “neither confirm nor deny the existence of an investigation,” but added that it was cooperating with United States and international regulators in examining “potential abuses and destabilizing effects related to the use of credit-default swaps and other opaque financial products and practices.”

Goldman declined to comment, citing its policy of not addressing legal or regulatory matters. But in a Feb. 21 presentation, Goldman said, “The Greek government has stated (and we agree) that these transactions were consistent with the Eurostat principles governing their use and application at the time.” Eurostat is the European Union’s statistics agency.

Goldman is not the only bank that supplied derivatives designed to lower deficits. In the late 1990s, JPMorgan Chase helped Italy reduce its budget gap by swapping currency at a favorable exchange rate. In return, Italy committed to future payments that were not booked as liabilities.

A spokeswoman for JPMorgan said that Italy disclosed all of the deals to Eurostat.

Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the Senate Banking Committee, also took aim at credit-default swaps, which allow banks and hedge funds to wager on whether a company or country might default.

Critics say the swaps have contributed to Greece’s problems and increased the odds of a financial collapse.

“We have a situation in which major financial institutions are amplifying a public crisis for private gain,” he said.

The Fed inquiry was begun about three weeks ago, according to an official involved in the investigation who was not authorized to comment publicly. Fed examiners are focusing on whether Goldman and other banks complied with guidance the Fed issued in 2007 outlining how to manage the risk of complex financial vehicles. The investigation is still in its early stages, he added, as officials sift through records detailing how the derivatives were created, what compliance procedures were followed and what internal analysis was performed. The Fed is also looking at whether Wall Street made additional financial arrangements for Greece that have not been disclosed.

Growing concern over these transactions have made investors more doubtful than ever about the government’s ability to quickly secure tens of billions of euros in new financing it needs to avert default. Greece faces a critical test next week, when it will try to raise about 3 billion euros ($4 billion), through an issue of 10-year bonds.

But with threats of a downgrade to its sovereign debt looming, investors say Greece would need to pay a whopping 7 percent interest rate just to get people to buy. That is almost a percentage point more than the rate investors received in the previous Greek bond sale, in January, and a full 3 percentage points more than Greece’s borrowing cost before the current crisis.

A spokeswoman for the Greek Finance Ministry did not respond to a request for a comment.

The rise in investor skepticism has led Greece to adopt a new financing strategy. Instead of selling debt through public auctions, where the danger of a failed offering could further unnerve markets, it has gone directly to institutional investors, sounding them out in one-on-one meetings, mostly in London.

Bankers and analysts in Athens say there is a debate within the Finance Ministry as to whether the government should go to the market now, or wait until a new menu of changes — like more taxes and further public sector wage cuts — is announced, in the hope that such measures will result in lower financing costs.

But a more dire view is already taking hold, according to some bankers, as investors fret that Greece may simply not be able to cover 20 billion euros of debt coming due in April and May, and 53 billion euros for all of the year. It seems unlikely that such a quantity can be raised from investors — many of them conservative pension funds and insurance companies that are already nursing losses from the 8-billion-euro Greek bond issue in January that was hit by the recent market downturn.

American employers eliminated 4.2 million jobs in 2009 and sent unemployment soaring into double digits for the first time in more than a quarter century.

Since the fall of last year, the official jobless rate has been over ten percent, while the unofficial rate (taking in the severely underemployed and those who have given up looking) has been over 17 percent.

And, despite the ridiculous “green-shoots” speculation of the Obama administration and overblown “recovery” fantasies of the financial media that has blown every major economic story of recent years, the situation is getting worse.

Analysts had predicted that December layoffs would number around 8,000.

Unemployment held steady at 10 percent – not because the job market is stabilizing but because tens of thousands of Americans gave up looking for work and are no longer counted among the unemployed.

The sharp drop in the labor force is not merely an indicator of the real unemployment rate. It is a confirmation of the mounting hopelessness in vast stretches of the United States – particularly in California, southern New England and the Upper Midwest and Great Lakes States, where communities are being devastated by a federal auto-industry “bailout” that continues to encourage carmakers to shutter factories in U.S. cities and to relocate production to Mexico and China.

The new unemployment numbers are devastating, and they should send up red flares in Washington, a city where officials have so far has been absurdly neglectful of the most serious social, economic and political crisis facing the country.

The Obama administration and Democratic leaders in Congress are pouring a great deal of energy into trying to salvage something acceptable from the health-care reform debacle and, in the aftermath of the Christmas Day flight scare, they are increasingly focused on “war-on-terror” issues. (They may even be starting to recognize the extent to which the White House bungled things by spending a fall focused on Afghanistan when potential threats were elsewhere.)

There is no question that health-care policy and homeland security are serious matters.

But the most serious matter facing this White House and this Congress is mounting unemployment. As Senator Russ Feingold, the Wisconsin Democrat who has been struggling to turn Washington’s attention toward jobs issues for much of the past year said Friday: “Today’s jobs report underscores the need for Congress and the Obama administration to make jobs an immediate priority. The report shows that employment continues to lag so swift action is needed.” posted by John Nichols and his post is continued at the following weblink on TheNation.com Please continue reading the rest o f John Nichols blog at http://www.thenation.com/blogs/thebeat/514394/the_2010_political_timebomb_is_unemployment